Mankiw's Principles of Microeconomics Chapter 18

Pretend for a moment you are the instructor developing this course.  Write 3 short answer questions for an exam over this chapter that you believe cover the most important points in the chapter. Post all three questions on your blog.  Remember that an exam only has 10 questions and yet has to assess the students' understanding of the entire unit.

Most of us think we’re really just a bunch of wage slaves drudging through the doldrums of the day in order to pay for our debts, while at the same time adding to the riches of others. As a worker, we don’t always think about the market for us, for our services, for what we bring to the table as a factor in the production process. 

“Workers of the world unite; you have nothing to lose but your chains” –Karl Marx

Like any market, the market for labor is driven by supply and demand. As a worker we control the supply, and the demand is controlled by the firm looking to increase production. A profit maximizing firm will measure the marginal product of labor as they hire in order to minimize the effects of diminishing marginal product. No firm wants to be over staffed which can create inefficiencies during the production process. As a firm owner, knowing what I’m paying for when it comes to labor is a critical piece of managing the overall business. One of the ways an owner does this is by calculating the marginal product of labor (MPL= ∆Q/∆L). Determining how much more the firm can produce with an extra worker and multiplying the value of that result by the price will give us the value of the marginal product of labor (VMPL= P x MPL). If we subtract the wage from this result it will give us the marginal profit. If marginal profit falls into the negative then the breaking point at which it turned negative is would give you the amount of workers needed to produce at the maximum profit point.

1) As a firm grows, it usually requires more labor in order to produce more output. What measurements would a firm want to get prior to hiring additional workers and how would the firm use the data?

2) If you were to graph the value of the marginal product of labor, what is one factor that contributes to the line sloping downward? Give 2 reasons why the labor demand curve could shift in either direction?

3) Consider the supply of labor for a moment. How would government policies surrounding the extension of unemployment benefits impact the amount of labor supplied in the marketplace? In what direction would the supply curve shift and why?